Adele Ferguson defines exactly what is clipping the wings of Australia's ailing national carrier.
For Qantas chairman Leigh Clifford, free markets are good for everyone except the national carrier.
Hours after Qantas hollered for government help after revealing it would lose up to $300 million in the first half of the year, Clifford stood on the podium at the annual dinner for the conservative HR Nicholls Society and warned the airline was challenged.
Less than 12 hours later, the airline would be in a trading halt as credit ratings agency Standard & Poor's downgraded its credit rating to junk and its main shareholder Capital Group, which has stood with it through thick and thin, reduced its stake from just more than 10 per cent to 8.9 per cent.
If the share price falls below $1 there is talk it might attract hedge funds or private equity to form a consortium and attempt to buy the airline and its many parts to bust it up.
It seems hard to believe that a few weeks ago Qantas was in the market buying back its shares. Even harder to reconcile is that in August it was telling shareholders: "We have many reasons to be optimistic. Our structural advantages as a group remain ... And we have the right strategy for a bright, successful future."
Speaking to an audience of like-minded economic purists, Clifford reconciled his views with the cries for help from Qantas boss Alan Joyce by saying the aviation industry is "a little different ... A purist can say let the market rule, but the airline industry is a little different and it is vital to Australia that it has a national carrier that is available and in times of crisis it is able to respond and evacuate people, as it did in the Middle East, Tripoli and Bangkok."
The problem with this argument is it smacks of vested interest. The car industry, grain industry, mining industry and manufacturing all believe they are "a little different" and should be treated accordingly. In other words, turn to Canberra for a helping hand.
Qantas and aviation are not different from other industries. In Europe, many countries have realised the era of national carriers is over as the European Union has emerged.
But Clifford is right when he says Qantas is pressured. Besides the huge losses, the need to slash another 1000 staff and seek a further $2 billion in cost cutting over the next three years, it has been forced to look at all options to shore up its balance sheet.
This is speculated to include the partial or full sale of assets including its frequent flier business, its freight operation, the sale of equity in aircraft and the sale of its terminal at Sydney Airport, all of which could release billions of dollars to the airline.
The problem with this is it is ill-timed and smacks of desperation. All year the sharemarket has been strong and has had a good appetite for floats, yet Qantas has sat idly instead of getting ready to offer its frequent flier business. Now, when it is on the back foot, and has called on the government for help, it says it will look at "all options".
The brutal reality is Qantas could have raised equity when its share price was trading at $1.80 in April, instead of the $1.07 it closed at before being placed into a trading halt ahead of the S&P downgrade. Now, it has closed off that door unless it virtually gives the equity away. After the trading halt was lifted, the shares started to fall towards $1 a share.
But the downgrade is a body blow. If Moody's follows suit, it will reinforce the impact. On Thursday night, it placed its credit rating under review.
Until now, Qantas was one of three airlines in the world with the coveted investment-grade status. Now, there are two. From a financial perspective it increases the cost of Qantas' debt by a speculated $150 million, at a time when the carrier is facing potential full-year losses of $800 million.
Worse still, it has to place funds received for credit card bookings into restricted accounts. It can access the money only when the flight is taken.
It also raises questions whether there will be any impact on its frequent flyer business.
Clifford believes the Qantas Sales Act contributes to an unlevel playing field. He says: "Australia is one of the most open markets in the world for airlines to operate. You can be 100 per cent foreign-owned and operate in Australia."
Indeed, it is one of the issues the company has raised with the government. The sales act prevents foreign ownership of the airline creeping above 49 per cent and prevents a single foreign airline owning more than 25 per cent.
Clifford and Joyce are right, the act is antiquated, but it is questionable whether the airline would attract more foreign interest if the law was changed. Currently, no foreign airline has an investment in Qantas, and foreign investors have not reached the 49 per cent limit. As of last week, foreign investors held an estimated 40 per cent of the stock.
Qantas announced a major alliance with Emirates in September 2012, which resulted in it cutting ties with British Airways and Air France. It has also shed many staff, despite a comment by Joyce in November 2012 that he "can absolutely say that this [Emirates partnership] is not going to be a risk to employment at Qantas".
In August 2012, Qantas announced plans to cut 2800 jobs, weeks before putting the final touches to the Emirates alliance. It announced a further 300 staff cuts in November 2013 and, in December, said that figure would blow out to 1000.
In sharp contrast, Qantas' nemesis Virgin Australia has grown its workforce from 6400 to more than 9500.
When Joyce took the top job five years ago, he had an $8 billion merger deal on the table with British Airways. The deal had been brokered by his predecessor Geoff Dixon and if it had gone ahead Qantas would have had 55 per cent and British Airways 45 per cent. Clifford would have been chairman and Willie Walsh would have run the merged entity, with Joyce the boss of the Australian enterprise.
Joyce decided to harpoon the deal and, later, British Airways joined forces with Spain's Iberia airline to create Europe's third-biggest airline. The rest is history.
If Joyce had done the deal with British Airways, things might have been different. Instead, he finds himself battling Virgin Australia, which has resulted in a fare war and the resultant sacrificing of profits to protect Qantas' 65 per cent market share.
It is this obsession with 65 per cent market share - as well as some flawed strategies in Asia and a focus on Jetstar - that has got Joyce and the airline in the present situation. The concern is the 65 per cent market share line in the sand is based on the "S-curve" phenomenon, which measures capacity share against revenue share. The theory is there is a certain profit optimisation point where if you add more capacity, you get little in the way of increased revenue, but if you lose capacity, revenue can fall off a cliff. Joyce believes the figure that needs to be protected is 65 per cent.
According to a McKinsey paper published a few years ago, the S-curve is based on the premise that airlines providing a high frequency of flights attain disproportionately high market shares. The high-margin corporate market flies with carriers that offer the most flights, lounges and loyalty programs.
The 2006 report said management needed to move on from the theory: "The S-curve principle has been hard wired in the heads of many network planners for decades. Nevertheless, times are changing and airlines need to take stock of what does and doesn't work."
Against a backdrop of woes and a tough competitor in Virgin Australia, which has just raised $350 million in fresh equity, Qantas has backed itself into a corner and is left to blame its predicament on an unlevel playing field. If it does not get a handout from the government it will be forced to rethink its S-curve obsession and back down on the excess capacity it is pouring into the market.
Virgin's key shareholders - Singapore Airlines, Etihad and Air New Zealand - have sent a strong message to Qantas that they back Virgin and its boss John Borghetti in his quest to reinvent the airline from a low-cost carrier to a full-service airline. They are also not about to go away. They see Virgin as an investment. Two of the three are listed companies whose masters are their shareholders.
At some stage Virgin will be kicked out of the S&P/ASX 200 Index as its free float is already below the 30 per cent threshold. That, combined with creeping rules, suggests that within the next year Virgin will be removed from the stock exchange, which will make it harder for Qantas to know how it is going.
The battle between the two airlines has cost both a fortune. Virgin posted a $150 million pre-tax loss for the year and Qantas is likely to post a full-year loss of $800 million, or more.
It has prompted calls for the heads of Joyce and the board. But Clifford shrugs it off. "I have a scrapbook full of that," he says.